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1e Smart Choices Notes

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11 views6 pages

1e Smart Choices Notes

Uploaded by

echolllin242
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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The Eight Elements of Smart Choices

Based on Hammond, J. S. Keeney, R. L. & Raiffa, H. (2002). Smart choices: A practical


guide to making life decisions. New York: Broadway Books.

A PrOACT-UTLink Approach: Divide and Conquer

Problem: Formulate the right decision problem


Objectives: Specify your objectives
Alternatives: Create imaginative alternatives
Consequences: Understand the consequences
Tradeoffs: Deal with objective (goal) conflicts
---------------------------
Uncertainty: Clarify your uncertainty
Risk Tolerance: Look for the right level of risk for you
Linked Decisions: Consider temporally linked decisions

Psychological Mechanisms underlying PrOACT-UTL


Problem: Risk perception, Social cognition, Valuations
Objectives: Reference points, Goal setting
Alternatives: Information search, Memory
Consequences: Risk perception, Anticipatory emotions
Tradeoffs: Bounded rationality, emotion-cognition conflict
Uncertainty: Probability judgment
Risk Tolerance: Personality, motivation, attention focus
Linked Decisions: Feedback effects and future discount

Making Smart Choices


How to think about your whole decision problem: a proactive approach
Making decisions is a fundamental life skill.
• You can learn to make better decisions.
• Use the PrOACT approach to make smart choices.
• There are eight keys to effective decision making.
– Work on the right decision problem.
– Specify your objectives.
– Create imaginative alternatives.
– Understand the consequences.
– Grapple with your tradeoffs.
– Clarify your uncertainties.
– Think hard about your risk tolerance.
– Consider linked decisions.

1. Problem
How to define your decision problem to solve the right problem

• Be creative about your problem definition.

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• Turn problem into opportunities.
• Define the decision problem.
– Ask what triggered this decision. Why am I even considering?
– Question the constraints in your problem statements.
– Identify the essential elements of the problem.
– Understand what other decisions impinge on or hinge on this definition.
– Gain fresh insights by asking others how they see the situation.
• Reexamine your problem definition as you go.
• Maintain your perspective.

Application: Alan’s Office Selection

2. Objectives
How to clarify what you’re really trying to achieve with your decision

• Let your objectives be your guide.


• Watch out for decision pitfalls.
• Master the art of identifying objectives.
– Write down all the concerns you hope to address through your decision.
– Convert your concerns into succinct objectives.
– Separate ends of from means to establish your fundamental objectives.
– Clarify what you mean by each objective.
– Test your objectives to see if they capture your interests.
• Practical advice for nailing down your objectives.

3. Alternatives.
How to make smarter choices by creating better alternatives to choose from

• Don’t box yourself in with limited alternatives.


• The keys to generating better alternatives.
– Use your objectives—ask “How?”
– Challenge constraints.
– Set high aspirations.
– Do your own thinking first.
– Learn from experience.
– Ask others for suggestions.
– Give your subconscious time to operate.
– Create alternatives first, evaluate them later.
– Never stop looking for alternatives.
• Tailor your alternatives to your problem.
– Process alternatives.
– Win-win alternatives.
– Information-gathering alternatives.
– Time-buying alternatives.
• Know when to quit looking for alternatives.

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4. Consequences
How to describe how well each alternative meets your objectives.

• Describe consequences with appropriate accuracy, completeness, and precision.


• Build a consequences table.
– Mentally put yourself into the future.
– Create a free-form description of the consequences of each alternative.
– Eliminate any clearly inferior alternatives.
– Organize descriptions of remaining alternatives into a consequences table.
• Compare alternatives using a consequences.
• Master the art of describing consequences.
– Try before you buy.
– Use common scales to describe the consequences.
– Don’t rely only on hard data.
– Make the most of available information.
– Use experts wisely.
– Choose scales that reflect an appropriate level of precision.
– Address major uncertainty head on.

5. Tradeoffs
How to make through compromises when you can’t achieve all your objectives at
once

• Find and eliminate dominated alternatives.


• Make tradeoffs using even swaps.
• The essence of the even swap method.
• Application of the even swap method.
– Determine the change necessary to cancel out an objective.
– Assess what change in another objective would compensate for the needed change.
– Make the even swap.
– Cancel out the now-irrelevant objective.
– Eliminate the dominated alternatives.
• Simplify a complex decision with even swaps.
• Practical advice for making even swaps.
– Make the easier swaps first.
– Concentrate on the amount of the swap, not on the perceived importance of the
objective.
– Value an incremental change based in what you start with.
– Make consistent swaps.
– Seek out information to make informed swaps.
– Practice makes perfect.

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An Example of Office Location Evaluation and Selection

Alternatives
Objectives Lombard Baranov Montana
Alan’s commute 25 20 25 25
Remove the commute time
(min.)
attribute after making tradeoff
Client access (%) 80 70 80 85

Office services B C A

Office size 700 500 950


(sq. ft.)
Monthly cost 1,700 1,500 1,900
(dollars)

6. Uncertainty
How to think about and act on uncertainties affecting your decision.

• Distinguish smart choices from good consequences.


– A smart choice, a bad consequence.
– A poor choice, a good consequence.
• Use risk profiles to simplify decisions involving uncertainty.
How to construct a risk profile.
– Identify the key uncertainties.
– Define outcomes.
– Assign chances.
• Use your judgment.
• Consult existing information.
• Collect new data.
• Ask experts.
• Break uncertainties into their components.
– Clarify the consequences.
• Picture risk profiles with decision trees.

7. Risk Tolerance
How to account for your appetite for risk

• Understand your willingness to take risks.


• Incorporate your risk tolerance into your decisions.
• Quantify risk tolerance with desirability scoring.
– Assign desirability scores to all consequences.
– Calculate each consequence’s contribution to the overall desirability of the

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alternative.
– Calculate each alternative’s overall desirability score.
– Compare the overall desirability scores associated with the alternatives and choose.
• The desirability curve: a scoring shortcut.
– Create a desirability curve.
– Use the desirability curve to make a decision.
– Get additional insights by converting desirability scores back to money.
– Interpret desirability curves.
• Watch out for these pitfalls.
– Don’t overfocus on the negative.
– Don’t fudge the probabilities to account for risk.
– Don’t ignore significant uncertainty.
– Avoid foolish optimism.
– Don’t avoid making risky decisions because they are complex.
– Make sure your subordinates reflect your organization’s risk tolerance in their
decisions.
Open up new opportunities by managing risk.
– Share the risk.
– Seek risk-reducing information.
– Diversify the risk.
– Hedge the risk.
– Insure against risk.

8. Linked Decisions
How to plan ahead by effectively coordinating current and future decisions.

• Linked decisions are complex.


• Make smart linked decisions by planning ahead.
• Follow six steps to analyze linked decisions.
– Understand the basic decision problem.
– Identify ways to reduce critical uncertainties.
– Identify future decisions linked to the basic decision.
– Understand relationships in linked decisions.
– Decide what to do in the basic decision.
– Treat later decisions as new decision problem.
• Keep your options open with flexible plans.
– All-weather plans.
– Short-cycle plans.
– Option wideners.
– “Be prepared” plans.

9. Psychological Traps
How to avoid some of the tricks your mind can play on you when you’re deciding.

• Over-relying on first thoughts:

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• Keeping on keeping on: the status quo trap.

• Protecting earlier choices:

• Seeing what you want to see: the confirming-evidence trap.

• Posing the wrong question:

• Being too sure of yourself: the overconfidence trap.

. Focusing on dramatic events:

. Neglecting relevant information: the base-rate trap.

• Slanting probabilities and estimates:

• Seeing patterns where none exist: the outguessing randomness trap.

• Going mystical about coincidences:

10. The Wise Decision Maker


How to make smart choices a way of life

• Get started.
• Concentrate on what’s important.
• Develop a plan of attack.
• Chip away at complexity.
• Get unstuck.
• Know when to quit.
• Use your advisors wisely.
• Establish basic decision-making principles.
• Tune up your decision-making style.
• Take charge of your decision making.

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